Shares of 3D Systems (DDD, Financial) jumped almost 7% going into Thanksgiving. The jump was probably the result of shorts covering their positions. Investors shouldn’t expect the company’s rally to continue as I believe the chances of 3D Systems moving higher from the present levels are next to zero.
3D Systems’ revenue is falling at a hectic pace. A double-digit drop in revenue growth for a growing company is unheard of, and the company's recent struggle should be enough to keep long-term investors away from the stock.
In the latest reported quarter, 3D Systems’ top line shrank roughly 18%. Moreover, peers such as Stratasys (SSYS, Financial) and ExOne (XONE, Financial) are also struggling as they reported sluggish sales numbers as well. Falling sales all across the sector is a good indicator that the 3D printing bubble has burst.
However, that doesn’t mean the stocks have bottomed. Investors should not buy 3D Systems in the hope of a turnaround. Things may get worse for the company going forward. Stratasys paid nearly $1 billion in the previous quarter as goodwill impairment charges. Given that 3D Systems has acquired nearly 50 companies over the last few years, I expect the company to report wide losses due to goodwill write-offs.
Moreover, despite the massive drop, 3D Systems is still not trading at a cheap valuation and has more room to fall. The entire 3D printing industry is worth about $6 billion and with the competition increasing every day, the sector has become fragmented. The recent expiry of patents has opened the floodgates for the entry of many new 3D printing companies in the market. 3D Systems was already struggling with margins and amid increasing competition; investors can expect margins to fall further.
All in all, the 3D printing industry is not big enough to accommodate so many companies. 3D Systems, being the market leader, will face the highest amount of scrutiny due to its falling margins. The added pressure of imminent goodwill write-offs will restrict the upward movement of the stock, which is why I think investors should still stay clear of the stock.
Conclusion
Despite falling from over $90 to under $10 in a span of two years, 3D Systems’ stock hasn’t bottomed yet. The pressure of goodwill impairment charges, along with the increasing competition, are big headwinds for 3D Systems going forward. Investors should sell the stock and continue avoiding it unless there’s a better entry point. 3D Systems can still depreciate about 20% in value, which is when investors should think about considering the stock.
